Photographer: Kiyoshi Ota/Bloomberg

Japan Stock Boom Seen Driven by Profits That Still Hinge on Yen

  • Bumper crop of corporate profits expected on yen weakness
  • Forex boost could fade after latest results, Daiwa says

After a record-breaking surge in Japanese blue-chip stocks amid all-time high corporate profits, the question is how long can the momentum last.

The Nikkei 225 Stock Average finally dipped Wednesday, after a 16-day winning streak that took it to the highest level since July 1996. The run-up led into the reporting season for the July-September quarter, which began in earnest this week.

Expectations have been high after the yen traded at an average of 111 per dollar during the three months ended Sept. 30, compared with 102.4 for the same period a year earlier. Companies have been delivering so far, with global powerhouses including Canon Inc. and Fanuc Corp. beating analyst estimates and raising their full-year outlooks.

“Better earnings are the biggest factor for the strong stock market recently,” said Masahiro Suzuki, an analyst at Daiwa Securities Group Inc. “After the earnings season, whether the stock market will maintain momentum or not will depend on the yen.”

Earnings per share of companies in the benchmark Topix index is expected to climb 5.2 percent to 112.7 yen per share in the fiscal year ending March 2018, according to the average of analyst estimates compiled by Bloomberg. Profits are expected to rise about 8 percent in each of the following two years.

Increasing profits have kept earnings-based valuations in check even as the stock market has heated up. The Topix is trading at 15.5 times earnings for the current year, trending down from above 20 times in 2013 and trailing the S&P 500’s current level of nearly 20 times.

To read Goldman Sachs’ view on Japanese earnings, click here.

Nomura Holdings Inc. raised its target levels for Japan’s equity benchmarks in the wake of the Nikkei’s record-breaking winning streak, mainly factoring in higher earnings estimates. The country’s largest brokerage says expectations are being priced into shares more quickly than usual, meaning it’s time to start looking ahead.

“Looking at past trends, we think the timing is approaching for switching the basis for investment decisions regarding stocks with March fiscal year ends from current-year earnings prospects to next-year earnings prospects,” strategists led by Hisao Matsuura wrote in a report dated Monday.

Those depend on movements in foreign exchange rates, according to Japan’s No. 2 securities dealer.

“Unless the yen weakens further, the positive effects of currency depreciation on exporters may run its course,” Daiwa’s Suzuki said. “It will probably be difficult to maintain momentum on corporate earnings unless the yen falls to around 115 by the end of the year.”

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